Managers may engage in classification shifting by:
A) reporting sales to fictitious customers to inflate reported revenues.
B) reduce estimates of accrued expenses to inflate reported net income.
C) reporting operating expenses as nonoperating expenses to inflate reported operating income.
D) increasing estimates of accrued expenses to inflate reported net income.

Question

Quizplus · Accepted Answer

Classification shifting involves moving expenses or revenues from one category to another to make financial results appear better, without changing the total net income. Option C, reporting operating expenses as nonoperating, inflates operating income, which is a classic example of classification shifting. Options A and B involve inflating revenues or net income through misrepresentation or estimation changes, which are more akin to fraudulent reporting or earnings management but not specifically classification shifting. Option D, increasing estimates of accrued expenses, would actually decrease reported net income, opposite of what classification shifting aims to achieve in terms of inflating performance metrics.

Managers May Engage in Classification Shifting By